Trading psychology is a topic that i've been thinking about more and more lately. While psychology is an important aspect of trading all markets, I believe it is especially useful to delve into in more detail for those who trade junior mining shares. Due to their high volatility and opaque nature, junior mining stocks can be especially treacherous for those who are less experienced and/or less aware of their psychological shortcomings.
One of the biggest mistakes I see investors make in the junior mining sector is taking things personally. What I mean by this is that they project a stock's day to day movements onto themselves, and vice versa (project their feelings and desires onto the stock). As a market participant it is crucial to be unemotional; the market doesn't care about you, it doesn't even know you exist, nor does it care about your feelings and thoughts as to what it should be doing.
I like to use the metaphor of a trader being the surfer and the market being the ocean. The trader waits for the right waves to come along and then times his entry and exit as best he can to catch the sweet spot of the wave, all the while doing his best not to get hurt or drown. When a surfer seeks too big of a thrill or gets careless bad things can happen and he can easily get seriously injured or worse. The same is true for a market participant who enters the market seeking thrills or to satisfy his own ego needs. The market is a master at crushing egos and turning thrill seeking into nightmares.
Today I decided to make a list of things I notice about my own psychological approach to junior mining stocks when I am trading and seeing the market well. I also decided to contrast that list with a list of things I have noticed about myself when my results drop and I am not seeing the market as well.
Pscyhological approach when trading well and seeing the market well:
- I allow the trade setups to come to me and I do not seek them out. In other words I don't wake up and head over to the computer with a mindset of "i'm going to make a bunch of great trades today", instead I analyse charts, news, and market price action and allow the complete picture speak to me. I am perfectly content with doing nothing.
- I don't allow my emotional state to affect my trading choices and/or my market analysis. If I feel that I am in an emotional state that isn't optimal for making trading decisions I step back from the market.
- My position sizing is appropriate for my total trading equity and normal day-to-day market volatility (noise) does not incite emotions of fear/greed within me (the emotions that always cause sub-optimal decision making in financial markets).
- I am not seeking anything from the market and I am not stuck on any specific outcome, either in terms of my results or in terms of stock price action or company news.
- I am open to different views of market price action and company analysis, and I am open to new information as it presents itself. I am open to changing my views and in turn adjusting my positions in the market.
- I am not impatient and I am also willing to sit tight and be right (as Jesse Livermore famously said) - allowing winning positions to grow larger and turn into bigger winners is probably one of the biggest keys to being a profitable long term trader/investor in the junior mining sector.
- I am open/willing to be wrong. When sufficient evidence presents itself to shift my view, and/or my risk tolerance levels have been reached or exceeded (stop losses hit), I am fine with exiting my position, assessing what happened, and moving on.
You can see a common theme in the above bullet points. The best trades occur in a state of flow and do not happen through forcing anything or projecting ones opinions upon the market. Allow the market to come to you and then let it show you that you are correctly positioned.
On the other hand, the worst trades usually come from being too stuck in ones views of how things should unfold and/or projecting ones wants/desires/opinions upon the market.
Psychological mindset for sub-optimal/poor trading decisions:
- Being committed to being right and not open to new information/viewpoints as they become available.
- Rationalizing ones market choices based upon conspiracy theories that are not rooted in reality/facts, simply because these theories help to rationalize ones market choices that are actually being made out of avoiding admitting that one is wrong (taking a loss).
- Not being objective in ones analysis. Seeking out views and information that confirms ones preexisting bias (confirmation bias), and arguing (often irrationally) against any views/data that goes against ones current market positioning.
- Seeking something from the market. Whether it is seeking thrills, ego boosts, money, or confirmation of how brilliant you are. This is a road to ruin and bad trading decisions. The market isn't here to make you feel better, pay your rent, or feed your ego. It is here everyday doing its things, and it will be here tomorrow whether or not you are participating in it. It doesn't know your personal circumstances, where you went to school, or what you think it is going to do.
- Trading too large and taking on too much risk without an accurate assessment of the potential downside. I see this all the time. People putting 50% of their account into one junior mining stock and then getting knocked hard when there is a 20% downswing. We have to remember that junior mining stocks regularly experience 50% declines, and many junior mining stocks will experience at least one 90% decline every ten years. This is the reality, so if you are putting 1/2 of your trading equity into one stock you should be prepared to lose between 25% and 45% of your equity every few years. I have a rule that I won't put more than 10% of my account equity into any single stock, and I will usually not put more than 5% (only high conviction plays that I deem to be lower risk get a 10% position sizing).
- Trading too much and/or feeling like i've always got to be buying or selling something. Often times the best move is to make no move. Let the market come to you, let the fat pitches present themselves and then be prepared to execute optimally. Forcing trades and paying extra commissions are great ways to lose money.
I think these lists are a great start but they are by no means exhaustive. Trading psychology is one of my favorite subjects, so I plan to delve into this topic further over the coming months.
Thanks for reading and please add any of your own insights into trading psychology/mindset in the comments section. I'd love to hear from you!
DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.